MUMBAI | BANGALORE For once, HCL Technologies, analysts' favourite whipping boy for its low profit margin, has something to thumb its nose at the IT big boys — revenue per employee — a metric where HCL has beaten them all. More importantly, at 51% growth in its revenue per employee from five years ago, HCL far outstrips its larger peers, including TCS, Cognizant, Infosys and Wipro.

The latest data could well be sign of changing fortunes at country's fifth-largest information technology (IT) services exporter that traces its roots to a IT garage startup from 1976. From having the lowest revenue per employee in 2006 to the highest in 2011, HCL's growth may be a leading indicator of where the firm is headed.

The real test for HCL would be its ability to convert its high revenue per employee into profits in a reasonable timeframe, so that the firm can cement its position not only as one of the fastest growing Indian IT firms, but also achieve better profitability, thus addressing analysts' concerns.

With about $12,444 per employee for the September quarter, HCL emerges on top of the heap while TCS stacks at fourth position with $11,734, only marginally better than Wipro, which generated $11,174 per head, lowest among the lot. Cognizant and Infosys ranked right below HCL with $12,315 and $12,311, respectively. HCL is expected to end the financial year in June with revenues of .`19,593 crore or about $4 billion. The revenue-per-employee index gains significance at a time when Indian IT firms are hiring tens of thousands of engineers every three months, causing the employee population to bulge like never before.

TCS hired over 20,000 engineers in the three months to September 30, taking its employee base to 2,14,770, fast approaching the quarter of a million mark. TCS is the nation's largest private sector employer behind state-owned Indian Railways with 13.6 lakh employees. Technology behemoth IBM employs 4,27,000, double that of TCS, but at about $100 billion, Big Blue has nearly 12 times TCS' revenue.

"In business, one focuses on creating a momentum and that is now clearly with HCL," chief executive Vineet Nayar said in an emailed response from the US, where he is visiting clients. "HCL growing faster than all its peers is a fact proven by our industry leading three year compounded average growth rate of 24%."

During the same period, HCL's employee base grew only 14%. HCL now has about 80,520 employees.

Nayar explained that since 2005, HCL has been focusing on what he calls total IT outsourcing services (TOS) leveraging the firm's expertise in managing IT infrastructure. "Over the years this focus on TOS has enabled us to win large, multi-service deals," said Nayar. "We have been able to double the number of customers in $50 million, $20 million and $10 million categories in the last two years."

Recently, outsourcing advisory TPI ranked HCL amongst the top six global service providers across America, Europe, the Middle East and Africa (EMEA), as well as Asia-Pacific. The company cites it as a validation of its business model.

WHAT THE CEO DIDN'T SAY

Unlike its peers, HCL has been hiring more experienced engineers — lateral hiring in industry parlance — whereas the likes of TCS and Infosys prefer to hire more from engineering campuses to keep their overall wage bill as low as possible. HCL hires laterals so they can be immediately assigned to new projects and being experienced, these engineers command a higher hourly billing rate, helping HCL earn more revenue per employee. The flip side is HCL needs to pay more for laterals and that pushes the wage bill which eats into profit margins.

Understandably, HCL's operating profit margin is around 17% compared to upwards of 27% for peers such as TCS, making them the Street's darlings.

While more experienced employees and a high proportion of infrastructure management services revenue help explain HCL's higher revenue per employee, the sharp jump from 2006 is because the firm has been reducing the share of the lowpaying call centre business and expanding in the higher-paying software consulting business.

Over the last 2-3 years HCL's BPO arm has been reducing voice-related work and simultaneously creating software platforms to handle entire business divisions of clients. Such platforms help HCL charge far higher fees for its comprehensive services. Another revenue productivity boost came in 2008 when HCL acquired UK-based Axon, which specialises in enterprise software consulting, for £441million, outbidding Infosys marking the largest outbound takeover by Indian IT firm till then. RIVALS' TAKE Interestingly, Wipro did the second best with a 16% growth over 2006. Its chief marketing officer Rajan Kohli says that over the past few years, there are several reasons for revenue per employee going up. There have been rate increases, higherend work such as consulting and non-linearity. Another rival, Infosys, says that higher consulting revenue and a new emphasis on higher value work will improve the company's revenue productivity going forward.

"We are constantly looking at moving up the value chain. Our investment in consulting and package implementation package is in that direction," said V Balakrishnan, chief financial officer and a member of Infosys board. "Even in BPO, we acquired certain IP which created nonlinear business which resulted in high revenue productivity business." TCS and Cognizant declined to comment for this story.

ANALYSTS' TAKE

Analysts' long standing gripe against HCL is its low profit margin profile. However, with the industry leading growth that HCL has delivered over the past few years, analysts are now willing to listen. "With the acquisition of Axon and HCL's strength in infrastructure services, the firm has been able to win large deals. To get those deals off the ground without losing time, HCL has been hiring laterals in large numbers," said the vice-president of research at a domestic brokerage who did not want to be named. "Going forward what HCL will likely do is hire more freshers and assign them to projects that are running smoothly and move laterals to newly-won deals."

There are also analysts who do not think that revenue per employee can be a true indicator of inherent strength or weakness of business models of different IT firms. "Revenue per employee could be a function of onsite-offshore employee mix, pass-through revenue from data centres, as well as sub-contracting where work is passed off to third-party engineers and revenue booked without counting the subcontractors in your head-count," said Viju George, executive director at Indian broking arm of JPMorgan.

HCL still has some serious catching up to do with comparable global peers. At about $28,300 per employee, during the last reported quarter, Accenture generates more than double that of HCL. HCL's chief executive is also reluctant to get into the numbers game.

"To view a company only from the lens of size, to me, is like viewing an incomplete picture. Both size and innovation matter and at HCL we hold equal aspirations for both," Nayar said. "Going forward my vision is to continue on this path and ensure that we compete only with ourselves to get better at what we want to be and not what someone else wants us to be."